Tax change makes Australia less attractive to top talent

Froced out: There may be a spate of foreign workers moving back home
Michele Mossop

The living away from home allowance (LAFHA) is possibly one of the greatest perks in a salary package offered to foreign and domestic workers.

On July 1 that was all supposed to change. The federal government was going to scrap the LAFHA for non-residents from the start of the month.

Under the change, first flagged during the mid-year economic review last November, non-residents would get a tax-free LAFHA only if they maintained a home in Australia that they are living away from.

Then in the May budget, the government was also going to make further changes from July 1.

This time it was to the rules affecting domestic workers – they would also have to meet the same requirement of maintaining a home in Australia they are living away from, meaning they would no longer be able to rent out their primary house.

And even if eligible, they would then be limited to getting LAFHA for a maximum of 12 months.

Although the changes are still going ahead, the start date for the reforms has been pushed back to October 1, giving confused businesses time to adjust and their accountants time to help their clients re-arrange staff salary packages.

Assistant Treasurer David Bradbury announced the new start date last month after business and industry groups complained that they were being rushed through.

It was also partially because the draft legislation enabling the changes hadn’t even been introduced into parliament until the final parliamentary sitting week in June before the winter break.

“The deferred starting date avoids a whole swag of problems that business otherwise would have faced in implementing the changes,” the Institute of Chartered Accountants of Australia’s tax counsel, Paul Stacey, says. “In part it avoids businesses being in the invidious position of having to decide whether to apply the current law or the anticipated law when it comes to deducting PAYG from July pay packets.”

Accountants are pleased there’s more time but say that when the policy changes finally kick in there may be a spate of foreign workers moving back home and domestic employees on interstate work arrangements will be harshly affected.

“Australia will be a less attractive place for foreign nationals because the cost of living here is so high,” KPMG partner Julie Donnellan says.

“It will cost organisations more to bring the necessary skills to Australia and talented people are likely to look elsewhere, such as the US and the UK, which have tax concessions for housing.”

It’s highly unlikely that people from overseas will maintain a home in Australia, Pitcher Partners tax manager Gary Matthews says.

“The criteria set is impossible to be met,” he says. “The requirement to maintain a home in Australia and live away from that somewhere else in Australia isn’t what overseas employees will do. They’ve created an uneven playing field [as compared with other countries] by shutting off overseas employees from these concessions.

“The impact will be that companies will have to pay more to attract overseas employees or won’t be able to attract them any more.”

The long-term impact is yet to be seen. In the meantime, accountants are working with their clients to implement one of two strategies to deal with lost tax incentives for foreign and domestic workers.

First, the organisation agrees to cover the cost of the increased tax (this is happening in mining businesses where there is a critical need for workers).

The other approach (more typical in the struggling financial services sector) is to push the cost back onto the individual worker, which many fear may result in the staff member packing their bags and going home.

Although some businesses are looking to help clients with the increased cost burden, PwC tax partner Norah Seddon says many can’t afford to.

“Some people are providing one-off additional amounts – that says we know you have additional cost, here’s a one-off amount to help you transition through the changes,” she says.

“Other employers are saying, ‘We’re sorry but our business can’t bear the cost of helping you’. The employees end up paying tax and their net package after tax goes down.”

The impact on smaller businesses is also being felt. “Our clients are struggling with how they’re going to deal with this,” Grant Thornton’s associate director of tax, Elizabeth Lucas, says.

“This is a major commitment that they’ve made to people and projects and it’s blown their budgets out of the water. It’s extremely unfair to have done that to the businesses and the individuals involved.”

Pitcher Partners’ Matthews says even accounting firms will be affected.

“We have a lot of secondment overseas and interstate as well,” he says. Many of his business clients negotiated contracts for two or four years that now have to be revised.

“I had a client that was on a $120,000 salary package and by losing LAFHA, he will have to have his package increased by $20,000 – that’s $20,000 that the employer has to find, not to mention additional expenses like superannuation and WorkCover.”